Hawaiian Electric Industries Inc (HE) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Hawaiian Electric Industries, Incorporated Q4 and 2015 earnings conference call.

At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Clifford Chen, Manager of Investor Relations. Mr. Chen, you may begin.

Thank you, Andrea. Welcome, everyone to Hawaiian Electric Industry's 2015 fourth quarter and year end earnings conference call. Joining me this morning are Connie Lau, HEI President and Chief Executive Officer, Jim Ajello, HEI Executive Vice President and Chief Financial Officer, Alan Oshima, Hawaiian Electric Company President and Chief Executive Officer, and Rich Wacker, American Savings Bank President and Chief Executive Officer, as well as other members of senior management.

Connie will provide an overview followed by Jim who will update you on Hawaii's economy, our results for the fourth quarter and year end 2015, and our 2016 earnings guidance. Then we'll conclude with questions and answers. In today's presentation, management will be using non-GAAP financial measures to describe the Company's operating performance.

Our press release and web cast presentation materials which are posted on HEI's investor relations website contain additional disclosures regarding these non-GAAP measures including reconciliations of these measures to be equivalent GAAP measures. Forward-looking statements will also be made on today's call.

Actual results could differ materially from what is described in those statements. Please refer to the forward-looking statements disclosure accompanying the web cast slides which provide additional information on important factors that could cause results to differ.

The Company undertakes no obligation to publicly update or revise any forward-looking statements including EPS guidance whether as a result of new information, future events or otherwise.

I will now turn the call over to our CEO, Connie Lau.

Thank you, Cliff. Aloha to everyone. I'm pleased to report that our operating companies delivered solid financial results. With earnings in line with our 2015 EPS guidance. Earned ROE was 8.6% on a GAAP basis and 9.4% excluding merger and spin related expenses.

At the utility, we continue to work toward Hawaii's new target renewable portfolio standard of 100% by 2045 by modernizing our electric grids, integrating more renewable energy and pursuing new customer options.

Even though lower oil prices have reduced our typical residential customer bills which for our largest system on Oahu are down 30% from $183 in September 2014, to $127 currently, we remain committed to reducing our state's reliance on imported oil and our customer's bills by pursuing lower cost renewable projects and greater cost efficiencies.

At the bank, we delivered solid revenue growth of 6% and loan growth of 4% while our credit quality remained sound. We saw strong deposit growth of 9% and maintained healthy capital levels.

And just yesterday, the Hawaii Public Utilities Commission concluded the second round of evidentiary hearings on our utility merger with NextEra Energy with a third round scheduled to reconvene the week of February 29th. We continue to believe that NextEra Energy is the right partner for Hawaiian Electric to achieve Hawaii's clean energy goals.

Our bank continues to prepare for their cross conditional spin-off as an independent publicly traded company and plans to file their updated SEC form 10 this March. We continue to believe the spin-off of our bank and our utility merger with NextEra Energy will benefit our Hawaii customers and communities as well as shareholders.

Hawaiian Electric continues to be a national leader in clean energy and Hawaii which leads the nation in the integration of customer sited solar continues to be the Coast Guard from the future of a rapidly changing utility industry.

As of December 31, 2015, over 13% of our total customer accounts had energized PV systems including almost a quarter of single family homes in our service territory with an additional 6% of single family homes approved and awaiting installation or activation. To put this into perspective for you, rooftop PV on our largest system on Oahu provided 343 mega watts of capacity, approximately 30% of our daytime peak.

There are times when renewable sources have powered up to approximately 50% of electricity needs on Oahu and up to approximately 60% on Maui and Hawaii island. Overall, renewable source met 22% of our customer's energy needs in 2015, far out pacing Hawaii's 2015 required RPS of 15%. And we are on our way toward achieving the next goal of 30% by 2020 based on Hawaii's amended RPS law.

And just this week, Hawaiian Electric was honored for having the renewable integration project of the year at the 26th annual DistribuTECH conference, the nation's largest electric transmission and distribution industry show. The winning project is a demonstration test of a grit edged system to enable integration of increasing levels of rooftop PV systems. The goal is to allow utility system operators to see in real time two-way power flows at the neighborhood distribution level.

This will allow operators to regulate voltage based on how much power PV systems are producing and how much power customers at the grid edge are consuming. Which is essential to maintaining reliability for customers.

In other utility developments, since our third quarter earnings call, as part of our PUC authorized five-year EV charger demonstration project, Hawaiian Electric now offers five utility own and operated fast charger options on Oahu and Maui. Our newest Oahu fast charger which just opened in January 2016 includes an integrated battery energy storage system which is part of a joint project with the Electric Power Research Institute.

Energy storage paired with the fast charger is designed to reduce the impact of EV charging on the grid. In late December, the utilities filed applications for PUC approval of a proposed tariff structure for a demand response portfolio. And deferral and recovery of certain computer software and software development costs were a demand response management system through the existing renewable energy infrastructure program surcharge.

In addition, our utilities proposed a number of programs to expand clean energy options for customers. In October, our utilities proposed community-based renewable energy program and tariff to the PUC. This program would allow customers who cannot or choose not to take advantage of rooftop solar to receive the benefits of renewable energy to help offset their monthly electric bills and support clean energy. In November, our utilities proposed expanded time of use rate options for residential customers that encourage the use of power during times when solar and wind resources are most productive.

In addition, the utilities also proposed revised time of use rates for electrical vehicle charging and for the Hawaii department of education to help public schools manage their energy costs for cooling hot classrooms. Given our state's expectation of more El Nino weather which made some classrooms last summer quite unbearable.

In November, in response to a PUC order, our utility submitted a plan for revising our previously filed 2014 power supply improvement plan. Revision of these important energy plans will help chart a course to achieving our state's 100% renewable portfolio standard goal by 2045 through diverse renewable resources including customer cited renewables, use of energy storage and other technology as well as actions such as demand/response programs.

Pursuant to the order, the utilities will be filing an interim (inaudible) update for the revision of these Power Supply Improvement Plans next Tuesday, February 16, and a final, revised Power Supply Improvement Plan by April 1, 2016. Turning to the pending merger in spin, the second round of evidentiary hearings conclude on February 10th and are scheduled to reconvene on February 29th to March 4th.

Closing briefs will follow after the hearings have ended. Thereafter, the PUC can render a decision but there is no statutory deadline for a decision. We have previously received shareholder approval, FERC approval and the Hart-Scott-Rodino waiting period has expired.

For the bank spin other than our SEC form 10 update, we require Federal Reserve Board of approval to deregister ATI as a savings and loan holding company when the bank is spun out.

I'll now ask Jim to cover Hawaii's economy, our 2015 financial results and 2016 EPS guidance.

Thanks, Connie. I'll briefly comment on Hawaii's economy.

Visitor arrivals exceeded 8.6 million visitors and total visitor expenditures amounted to more than $15 billion. Increasing 4.1% and 2.3% respectively from 2014. These marks set new records for the fourth consecutive year.

Statewide unemployment dropped to 3.2% in December of 2015. The lowest rate since January of 2008, compared to 4% a year ago, it is still significantly below the national unemployment rate of 5% as of December 2015. Hawaii real estate activity remains strong during December 2015 with the median sales price for single family homes on Oahu at $700,000, up 1.4% from last year and up 3.7% year-to-date.

In January, median prices of single family homes on Oahu rose again to $733,500. With respect to sales volumes, total home sales on Oahu in 2015 rose 5.2% from 2014. Construction activity increased in 2015 reflected by the value of private building permits which increased over 17% on Oahu compared to year-to-date December 2014. This increase was primarily driven by the increase in residential projects.

Overall, Hawaii's year-to-date economic performance is being sustained by continuing strong activity in the construction sector, the tourism industry and the University of Hawaii forecasters expect state gross domestic product to grow 3.1% in 2016.

As shown on slide seven, 2015 GAAP earnings per share were $1.50. Excluding merger and spin related expenses of $0.15 per share, 2015 core earnings per share were $1.65. At the higher end of our 2015 EPS guidance range of $1.60 to $1.66. Down slightly from the $1.68 per share in 2014.

As shown on slide eight, HEI's 2015 GAAP consolidated ROE was 8.6%. Excluding merger-related expenses, HEI's 2015 core consolidated ROE was 9.4% with ROE contributions of 8% from the utility and 10% from the bank.

On slide nine, utility earnings were $136 million in 2015 compared to $138 million in 2014. Utility EPS of $1.27 was within our utility guidance range of $1.25 to $1.30. The variances are shown on the slide and I'll highlight a few.

On an after tax basis, the most significant year-over-year net income drivers were $7 million in higher depreciation expense for the integration of more renewable energy, improved customer reliability and greater system efficiency. And $3 million in higher O&M expense rising in line with inflation at about 1% higher compared to the last year which was driven primarily by the following.

Write-off of previously incurred enterprise resource planning software costs, additional environmental reserves, higher employee benefit costs which were partially offset by higher 2014 costs for the initial phase of the smart grid installations. The higher expenses were partially offset by $7 million in higher net revenues, primarily attributed both to the recovery of cost for the clean energy and renewable reliability investments.

At the bank, net income for the year was $54.7 million in 2015 compared to $51.3 million in 2014. Bank EPS of $0.51 a share was firmly in line with our guidance of $0.50 and $0.52. The most significant after-tax driver of net income increased from 2014 were $5 million in higher net interest income as contributions from loan and investment portfolio growth. More than offset the lower yield on earning assets.

And $4 million in higher non-interest income primarily due to higher mortgage loan originations and higher deposit-related fees. These increases were partially offset by $6 million in higher non-interest expense. Primarily due to higher pension and benefits expense. Slide ten shows the utilities actual ROE's for the year ended December of 2015.

The consolidated utility ROE was 8% in line with our 2015 guidance of about 8%. And declined from 8.4% in 2014 primarily due to higher depreciation and O&M expense, partially offset by the RAM increase and the higher average equity balance of 2015. Turning back to American Savings Bank on slide 11, in 2015, American continued to deliver solid profitability metrics in line with its targets.

We achieved a competitive return on assets of 95 basis points for 2015, meeting our target. We achieved loan growth of 4.1% in 2015 in line with our mid single digit loan growth target driven by increases in commercial real estate, residential and home equity loans. Our 2015 net interest margin was 3.5% on the higher end of our guidance range of 3.45% to 3.55%.

Our net charge-off ratio was four basis points in 2015, well under our target of less than 10 basis points and still extremely low relative to our peers. Overall, the bank continues to maintain its low risk profile, strong balance sheet and straight-forward community banking business model. On slide 12, our net interest margin of 3.55% in the fourth quarter of 2015 was two basis points higher than the linked quarter.

Our interest earning asset yield improved by 2 basis points primarily due to a shift in portfolio mix to higher yielding assets. Our liability costs of 22 basis points was unchanged compared to the linked quarter. We anticipate modest NIM compression going into 2016 as pricing of new loans continues to be lower than the current portfolio rates.

On slide 13, compared to the $61.2 million of non-interest income in 2014, the $6.6 million increase in 2015 was primarily driven by $3.4 million in higher mortgage banking income related to strong mortgage production in sales, $3.1 million in higher fee income on deposit liabilities due to deposit-related initiatives, $2 million gain on sale in the third quarter of 2015 of the American service center building vacated as part of our facilities consolidation plan and this was offset by $2.8 million in lower gain on sale of securities.

As a result of prudent risk management capabilities and the healthy local economy, credit quality at American remains strong. The 2015 net charge-off ratio was still a very low four basis points compared to one basis point in 2014.

Primarily driven by loan growth, the provision for loan losses in 2015 was $6.3 million compared to $6.1 million in 2014. The allowance for loan losses was 1.08% of outstanding loans of $50 million at year end compared to 1.06% at the end of the linked quarter and 1.03% as of the prior year end.

On slide 15, American's non-performing asset ratio was 1.02% at the end of the fourth quarter 2014 compared to 1% flat at the end of the third quarter, and .85% at the end of the fourth quarter of 2014. The increase from the fourth quarter of 2014 was primarily due to two commercial borrowers who are still payment current.

Slide 16 illustrates American's continued attractive asset yield and funding mix relative to our peer banks. American's December 31, 2015 balance sheet is stacked against the last complete data set for our peers which is as of December 2015. Nearly 100% of our loan portfolio was funded with low cost core deposits versus the aggregate of our peers at 87%.

In 2015, total deposits increased by $402 million or 8.7% while maintaining a very low cost of funds of 22 basis points. 15 basis points lower than the median of our peers. American remains well capitalized at December 31st with a leverage ratio of 8.8%. Tangible common equity, the total assets of 8.1% and total capital ratio of 13.3%.

In the fourth quarter of 2015, American paid $7.5 million in dividends to HEI, or $30 million in 2015 while maintaining healthy capital ratios.

Now I'll address HEI's outlook for 2016. Turning to slide 18, Other 2016 utility CapEx is estimated to be about $450 million comprised of baseline CapEx on major projects. 2016 baseline CapEx of $285 million in total expenditures include $2.5 million less primarily for the maintenance and operation of the grid.

Of the $285 million, $265 million is within the Rate Adjustment Mechanism, or RAM cap, and $20 million is above the RAM cap. Utilities may apply for recovery of revenues from major projects including baseline projects, a group together for consideration as major projects above the RAM cap for expenditures necessary to sustain the physical integrity of the grid and to assure reliable electric service for customers.

Other major projects in 2016 totaling $165 million primarily include $85 million for the proposed purchase of the 60 megawatt Hamakua Energy Partner's generating station for which we plan to submit an application to the PUC soon. And $61 million related to our Schofield Generating Station project. The overall cost of the project is now estimated to be $157 million.

Due to our currency hedge locking in a favorable US dollar/Euro dollar exchange rate. The 2015 ending rate base was $2.75 billion, or 1.2% higher than 2014 consistent with our guidance. After factoring in bonus depreciation of about $100 million which reduced rate base by approximately $40 million due to the increase in deferred taxes.

For 2016, we expect rate base growth of 3% to 4% net of bonus depreciation and including HEP. We estimate that bonus depreciation adds about $45 million to 2016 cash flows. Since our power supply improvement plan update to the PUC will not be filed until April 1, 2016, we'll only be providing our 2016 CapEx forecast at this time.

HEI starts 2016 with a strong capital structure with 53% consolidated common equity total capitalization. Our 2016 holding company financing plans include investments in the utility of approximately $145 million of which $50 million relate to the proposed purchase of HEP which is subject to PUC approval. Approximately $35 million in equity issuances to the dividend reinvestment plan which will generate just over 1% dilution. And we expect to refinance $75 million of long-term debt at the holding company and to issue additional debt to finance the remainder of our needs.

Based upon our current environment, we are initiating 2016 earnings guidance in the range of $1.62 to $1.75 per share. Excluding any merger or spin related expenses. We expect 2016 utility EPS in the range of $1.28 to $1.36 per share. And bank EPS in the range of $0.50 to $0.54 per share.

Based upon 2016 CapEx plan and about 50% common equity capitalization target, we expect our 2016 equity needs to be satisfied solely through the dividend reinvestment plan of approximately $35 million. At the utility, our guidance assumes no changes to the decoupling model for other recovery mechanisms.

We assume utility O&M will be down approximately 5% compared to 2015 levels as a result of continued cost containment efforts. And because our 2015 actuals included certain write-offs and reserves that are not expected to recur in 2015. Fuel efficiency should be consistent with our rate case levels and related heat rate demand.

However, changes in system demands could cause fuel efficiency to fluctuate outside the demand. We assume our rate-based growth to be approximately 3% to 4%. Net of bonus depreciation based on 2016 CapEx of $450 million including HEP and the long term debt issuance of $75 million to support CapEx. For which $35 million is for HEP. Overall, we expect 2016 utility GAAP ROE of about 8%.

At the bank, we expect mid single digit long growth which we expect to more than offset the effect of lower yields on net interest income. NIM should be between 3.45% and 3.55% as we expect the yield from our loans to continue to decline albeit at a slower pace. We expect a slight improvement in non-interest income through growth and fee income and deposit liabilities.

And on other financial products. Net charge-offs are expected to remain low at under 15 basis points. Provision is expected to be in the range of $8 to $12 million. Higher than 2015 due to additional reserves for loan growth and 2015 including recoveries of previously charged off loans.

With continued focus on cost controls, we expect improvements in our efficiency ratio. Overall, we expect return on assets of about 90 basis points.

Connie, I'll turn the call back to you.

Thanks, Jim.

In summary, our utility is focused on expanding customer options and lowering customer build while it leads the industry in integrating renewables and in distributed resources. We've also introduced new proposals like the community-based renewable energy and time of use rates to facilitate our state's transition to a 100% RPS goal.

Our bank will continue to focus on its core banking business, targeting mid single digit loan growth and strong credit quality while also preparing for life as an independent public company. And on Tuesday, our Board maintained our quarterly dividend of $0.31 per share, continuing on uninterrupted dividend payments since 1901. The dividend yield continues to be attractive at 4.2% as of yesterday's market close.

Finally, we firmly believe that as the Hawaii PUC merger review process continues, the commission and others should conclude that this merger will provide significant benefits for our customers and will accelerate achievement of the clean energy future we all want for Hawaii.

And with that, we look forward to hearing your questions.

Thank you. (Operator Instructions). Our first question comes from the line of Paul Patterson, with Glenrock. Your line is open.

The O&M, you mentioned 5% but that includes some one-times that you guys had. Without the one-times, what kind of O&M growth rate would you expect?

Paul, it's Jim. I would expect approximately 1% or so growth rate, x those one timers. (inaudible) increase.

Actually, that was in the release, I believe. I forgot that just now. And in terms of the updated PCIP's that we'll be getting next week, I guess, anything we should expect in that that might be significantly different?

Paul, let me just clarify. This is an update on the process to getting to the PCIP's which will be filed on April 1, so it is not in the nature of a preliminary PCIP, or an interim PCIP. It is strictly an update that comes in the interim.

Okay. Just turning to the bank for a second. You guys still have pretty conservative goals in terms of charge-offs and what have you. But looking at the provision for expense and the net charge-offs, there is significant increase in them. I'm just wondering with home prices doing what they did, what the big driver there might be?

So principally, the growth as we said, this is Rich. Sorry, Paul. The growth in the provision is coming as we grow the loan book from one piece because we've basically maintained our coverage or slightly increased the overall coverage rates.

We're also growing in some segments that have a little bit higher than the average coverage of the books. So the commercial real estate part as we go through the construction cycle here, growth in consumer, unsecured lending and some small business lending that are up slightly higher than the average and certainly higher than the residential book. So it is a mix item in there.

The second thing Jim mentioned, we had good recoveries this year on previous charge-offs. We don't expect those to reoccur.

Okay. And then, you know, as you know, there is a regulatory process underway and there's been some hearings and some coverage. I was just wondering if you could discuss how you guys feel about the prospects of Hawaiian Electric if the merger doesn't happen?

You know, I know that may not be what you guys want to think happens but just in general, since it has come up in the press and what have you, I was wondering if you guys might share about how you guys feel about the prospects of the Company if longer term, you guys gave us the 2016 number, but just further out, if we don't, if this merger doesn't take place?

So Paul, I think we're in a very exciting time in Hawaii's energy landscape. A lot of things are changing here as we all know. The amount of customers cited in rooftop solar in the islands is not exceeded by any other place in the nation today. And we've got great renewable resources here in the form of sun. I'm looking out my window right now and I hate to tell you but it is a beautiful, sunny day.

So you know, we have some wonderful resources here and of course, our wind resources are, the on land wind resources have capacity factors that are equivalent to offshore wind. So it is a very exciting time for Hawaii and I think that if the merger does not occur, although, as you point out, and we certainly believe, that that has significant value for Hawaii, we'll go it alone.

I think, you know, we feel that we can achieve the state's goals of 100% renewable by 2045. It won't be easy. But you know, it is a great time for technological developments and renewables and in grid technology, I mentioned you know, we really are leading in many of the grid edge technologies. And so we'll continue down that path to get to the 100% RPS.

Fair enough. And just, finally, with the rate base growth that you guys outlined in 2016, how should we think? There are some projects in there that are sort of pushing it up a bit. Being all set up with bonus depreciation. Outside of 2016, how should we think about the pipeline? Or, just what you guys are thinking in terms of rate base, longer term?

Paul, it is Jim again. We are going to defer the answer of that until we get a little bit further into the Power Supply Improvement Plan process of that in the latter part here in the spring. Also, due to the dependency of the merger and the expectation that it will close, we've decided to lay up here a 2016 number which does have a different mix than you're used to seeing because it does include two generating stations that is quite unusual for us to consider during one period. The Schofield Gen system that is going to go into construction pretty soon here at 157 million, about $61 million, I believe, will be spent for that.

And then, the Hamakua Energy Partners which is an acquisition. Again, somewhat unusual for us here. So those are lumpier additions to the CapEx plan. But I think we'll wait a little later in the year until the Power Supply Improvement Plan develops before we look out further and look at the progress of the merger before we look out further.

Okay, great. I'll let other people ask questions. Thanks a lot.

Our next question comes from the line of Charles Fishman, with Morningstar. Your line is open.

Hi. Thank you. The evidentiary hearings have run significantly longer than you thought. Is it due to the sheer volume of commoners and intervener's or is there something else going on?

No. That's exactly right. As you know, there's a lot of parties and intervener's and you know, we had hoped we would get through cross-examination of the intervener's witnesses in the second round but there's still eight to go, actually seven to go with the possibility of an eighth.

And then, you certainly have done a great job of getting the support of the business community of Hawaii. Has there been any movement on the governor's position in the last couple of months?

No. There has not.

Okay. That completes my questions. Thank you.

Our next question comes from the line of Andrew Weisel, with Macquarie. Your line is open.

Hey, everyone. To follow on that last question about the additional hearings being scheduled, how do you feel about the prospects of the commission making a decision on the merger by the June merger agreement deadline? And if that doesn't happen, can you walk us through the next steps of how that would play out?

Hard to say when the commission would render its decisions. After the conclusion of the evidentiary hearing, the parties will file closing briefs and we would expect that that would be done within the next 30 days or so. And then presumably at that point, the record would be complete and the commission would be in a position where it could render a decision.

But as I mentioned, there is no statutory deadline that exists today on rendering a decision. So it truly will be up to them. Our merger agreement does have a June 3rd date on it for regulatory approval and closing of the transaction. And both parties will have to look at the situation at that time and decide whether we want to continue forward or not.

Okay, great. Then in terms of the PCIP process, what is your expectation in terms of that running in parallel to the merger approval or if one will precede the other?

No. That's correct. Running parallel, so to speak, with the merger proceeding has been a lot of docket. As I mentioned, there's a lot going on in the energy landscape in Hawaii. So there is not only the Power Supply Improvement Plan's docket but there's also dockets on distributing energy resources. We just got the decision in the fall on net energy metering, demand response is another big area of focus for our commission. There are actually a number of dockets that are all running parallel to the merger docket. And they're all proceeding independently.

Okay. Very helpful. Then lastly, there is a legislative push to change the standard of merger approvals to be a significant net benefit. My understanding is that's a little bit ambiguous but how do you feel about the proposal that you guys and NextEra have collectively offered in terms of that qualifying as being substantial net benefits?

This is Alan. I think the package that has been proposed does provide net benefits. But that doesn't mean that there is a statutory requirement to meet that standard.

I thought that was being proposed right now by a new committee?

Oh, well. There's two separate things going on here. There's a legislative bill that would change the standard for review in Hawaii to a substantial net benefit and substantial is ambiguous. All of the other mergers in Hawaii have proceeded along with the no detriment standard. And changing the standard midstream, we believe, would be unconstitutional. That being said, what is being proposed by NextEra, we believe, does offer a large portion of net benefits to our customers in the state.

All right. Thank you very much.

Our next question comes from the line of Michael Goldenberg, with Luminous Management. Your line is open.

I have a question on your (inaudible) investment plan. I was wondering if you've ran your proposals of the power plant acquisitions and overall investment with the rating agencies?

Michael, this is Jim. Are you asking if we have reviewed the capital plans with the rating agencies?

Yes. If they're okay with the level of capital investment?

I wouldn't necessarily say they're okay with it. They're advised of what the capital plans are. This is a revision in the capital plans as you may know, Fitch recently had their review in December. The other agencies, a little before that time. And the plans are very much in line. Including the financing plans and the way we'll capitalize the investments for the utility. Very much in line with the present ratings.

And the other thing to stress here is that while the Schofield Generating System has been approved by the PUC, the Hamakua acquisition is yet to be proposed to the PUC. We'll do that later this month. And that acquisition would be subject to their approval. Both of those plants will be in the rate base, including HAP if it's approved. I don't anticipate any boundary issues with regard to ratings and long way of saying yes, they're aware of our plans.

Okay. And in your discussion with ratings, did they give you a sense that this level of spending could go on for many years and that would be supportive of credit ratings? So if you did discounts with this level of financing every year that that would be sufficient for the current credit ratings?

Right. I think this level of investment is very sustainable. Including the liquidity we need, the access to the markets we have. Near-term liquidity is very, very strong. Our capitalization is very, very strong. And we do not anticipate the replication of this kind of capital plan to be an issue for us going forward.

So the bottlenecks are rather finding the investment, having the commission approval, but not the credit rating agency's?

I think that's right, Michael. In fact, I would tag that on to the answer that we gave earlier to Paul about the ability to proceed in the event that the merger and spin does not occur as you probably remember both of those transactions are cross condition. So we expect and we're doing nothing different in the form of financing with the rating agencies and with regard to CapEx. Than we would otherwise do ourselves. We're acting independently in this context.

Got it. Thank you very much. Good luck.

You're welcome.

Our next question is from the line of Jackie Camaro, with KBW.

Rich, did you have any kind of a salary true up at year end or was that still related to pension and benefit expenses?

The comp line has been principally the pension and medical benefits.

Okay. Sorry. Go ahead.

So it's consistent with what we've been describing each quarter.

Okay. So Q4 is a pretty good go forward run rate then?

Yeah. On the comp and ben line.

Okay.

We're going to get some improvement on the pension, not so much on the medical benefits.

Okay. That makes sense.

With the discount rate, went up at year end.

Yes. That makes sense. Then also can you remind us, I know that when the deal was originally announced, you had talked about the $6 million after tax that you had plus (inaudible) in 2013. Given all of the deposit initiatives and growth you've had there, how much of that has translated into added inter-change income that might boost that $6 million number?

The spend continues to rise every year on the order of 2% or 3%. The $6 million was our 2013 number, right? Rates haven't been compressing much in the market overall. So we would expect that we would get a volume benefit. To be seen though, you never really know until you convert out and see exactly what the spend is.

Okay. And then could you just provide a little bit of color on some of the deposit initiatives you've been working through and if there's anything that you're not already implementing but you intend to look at as we head into the new year? Or, just the growth you're expecting is continued success from what you already have going on?

Yes. I think we've been able to do a good job on across the board. We've been able to get growth on the consumer side, small business, the commercial customer growth is coming in and we expect that to keep going. And we'll also be participating in some of the public's deposit market that we haven't really been proceeding in the past. So we expect to keep going.

Okay. As the fee income grows, I guess we will see the fee income grow as deposit growth continues to be strong next year. Is that a fair way to look at it?

That's our expectation.

Okay. Then just lastly looking at the loan growth, I saw you had strong commercial real estate growth in the quarter. Is that continued traction or is the environment there shifting at all and becoming more favorable?

You know, it's one we've been talking to you about all year. We were a little bit behind on fundings just on timing of some of the projects funding. A lot of it came through in the second half of the year. We will have some continued growth but then you'll also see projects completing and paying down as people buy out the residential units and things there. So we wouldn't expect the growth on commercial real estate to be as fast in 2016.

Okay. And are those project completions, is that taken into account when you give your loan growth guidance?

Absolutely.

Okay. And then was there anything unusual in the commercial book in the quarter? I noticed there was a bit of runoff there.

No. Normal ins and outs. Some shared national pay downs, some local refinancings. We have a good pipeline there and feel good about our ability to grow in that segment too.

Okay. How is your overall pipeline looking versus where it was a year ago?

Pretty good. You know we like to have the mid-single digit growth rate. We've been able to maintain that pretty consistently over the last several years and we feel confident we can keep that same growth rate.

Okay. Great. Thank you very much. I appreciate it.

Thanks, Jackie.

Our next question comes from the line of Joe Jiao with Avon Capital Advisers. Your line is open.

Hi. It is Andy Levi. How are you doing?

Hi, Andy, how are you?

I'm all right. Two quick questions. Just on the two major capital projects, you know, on the generation units, the $61 million and the $85 million, what's the recovery mechanism for those?

So the $61 million is part of the $157 million approval that we got last year for the Schofield generating station. So that one has been approved and the recovery for that has been approved. And then the $85 million...

I'm sorry to interrupt. On the Schofield, does that go into rates as you spend or is it AFUDC and then you have to file a rate case? How does that work or is it through like the RAM?

Andy, it's Jim. So it is AFUDC as it is under construction. So $61 million. Just to be crystal clear about it is this year's construction expenditures and the balance of the $157 million will happen primarily over the following year. And then once it's commissioned, it will go into regular rate base recovery.

Automatically once it is COD, I guess, right?

Yes.

Andy, it goes in as an approved major project.

So no lag on that. And then on the $85 million?

The $85 million, we have yet to file the application with the commission. And that's the purchase in existing PPA. We're purchasing out an existing PPA.

So theoretically, if you get approval of that, that should go right into rates?

Yes, Andy. It is Jim. Upon the purchase and approval, of course. And that's an existing project as Connie was saying, we'll be canceling the PPA along with the transaction. That's a dispatchable that we have today. On the big island. We're purchasing it from Arc Light. And that will be, as we said, subject to a PUC approval. What's unusual about this particular acquisition, if it is approved is that it saves customers, on bills immediately.

My experience and probably yours obviously when you add capital to a network including $85 million to a $460 million rate base on the big island, it is quite unusual but we're able to save customers immediately on their bills with the extinguishment of the PPA. It is one of the vintage PPA's that were, by today's standards, generous, let's say. So it goes into rate base. Saves customers right away.

And I assume the acquisition is subject to regulatory approval. Is that how it works?

Absolutely. Subject to regulatory approval. The application will go in soon. We announced the arrangement that we have with Arc Light around Christmas, December 23rd. And we had the application going in as we said, very soon.

My last question, just relates to price of power which if you look on page 26 of the handout, you kind of outline how oil has benefited rates and the customers, 2015 versus. 2014. Can you talk about just kind of how that is set up? Meaning that obviously oil has continued to drop and I don't know like how quickly the rates actually drop.

So that 24.3 that you outlined there, how low could that actually go kind of based on oil prices and also I guess this PPA that you're buying out? Because, if things stayed the same, if we got to the end of 2016, where do you think the average rate would be?

I don't know that we can give you the average rate on it by the end of this year but the way this works, Andy, is that the orange is the fuel. That would be going through the energy cost adjustment clause that has about a 30 to 60 day lag in that.

Then the yellow is the purchase power. And that one goes through two clauses, the energy portion of purchase power goes through the [ETAC?]. And then there's also a purchase power adjustment clause that picks up capacity payment.

Okay. So i guess through the PPA, you didn't quantify, maybe i missed it. How much that would lower rates?

Andy, it is Jim again. Regarding the acquisition of the Hamakua plant, HEP as we call it, we believe that will save customers immediately about $1 a month. The average bill is currently about $127. In fact, the $127 already differs from the chart you referred to because that's at $131. Clearly, this is a rapidly moving environment.

Then you don't have the ability, I said I only had one more question. I lied. You don't have the ability to lock in this oil price obviously since it is so, so low, for a long period of time, do you?

Presently, Andy, we do not have the authority to do the hedging. That's right.

Really? But if you were to get the authority, is there the ability in the market to buy that oil over one to two or three-year basis?

Yes. I think it would be feasible. There is liquidity out somewhere in the two to three year range. Bear in mind the locational differences that you have, right? So that's a bit of a challenge. Secondly, you've got different kinds of products. You've got intermediate fuel oil, low sulfur fuel oil, you've got diesel, and the like so you have to find matching correlated indices upon which to secure that kind of insurance.

Okay but is there any type of initiative to try to get the authority to do that since prices are so low and it obviously would benefit customers then you don't have to at least for a few years, worry about it or a year or two even?

I think that's a very fair question. We're thinking about that. We don't have anything presently on the run or subject to application. We've been pretty busy with a number of things at the moment. So we don't have anything presently in the pipeline. I'll let you know and the market know if we intend to do that.

Let me just back up to your first question about the typical bills. The $127 that actually Connie referred to in her remarks and then the chart on page 26 to which you referred is really on our major system Oahu which is about 70% of the system. The typical bills in the rest of the system run between $128 to as much as $160 a month. Fairly presently.

And the Hamakua energy project we spoke of, the roughly $1 a month savings is on a typical bill there of $160 a month. I just wanted to give you the clear stats by segment, if you will.

Great. Thank you, guys.

You're welcome.

Thank you. (Operator Instructions). Our next question comes from the line of Felix Herman, with Visium Asset Management. Your line is open.

Hi. This is Ashar. How are you doing?

Hi, Ashar.

Hey, Andy asked a lot of my questions. I just wanted to get a sense as to, if I do my quarterly earnings for the year, if I'm right as you mentioned. This new plant. When have you, in your budget for this year, when have you assumed that this thing gets approved and hits the bottom line?

We would say, Ashar, that the second half of the year is probably as tight an estimate as I can provide you. It is Jim.

Okay. But Jim, if I'm correct, one can assume there's like six months of earnings related to the plant in the 2016 guidance?

I think that's a reasonably fair estimate.

Okay. Okay. And then the second thing I wanted to get a little bit of a better understanding, you had mentioned that the O&M is going to be lower by 4% to 5%.

5% actually.

5%. Is that throughout the four quarters or is that tilted much more in one quarter versus the other? Can you give a little bit of a better delineation as to how we should model that?

Right. So i think you have a very good memory because in past years, probably through about 2012, 2013, we had a sort of a skew toward the third and fourth quarter but I think the utility has done a good job here of, over the last two years including this prompt year 2016, of managing their workload to be a fairly level basis. So you would take the roughly, I think it would correspond to about $386 million of an O&M budget. I would think that you would be fair to divide that by four and expect a fairly even profile to those expenses throughout the year.

Okay. Fair point. And then I apologize. I got on to the call a little late because the (inaudible) news hit the headlines. Connie, from your perspective, what is the main thing left in the merger proceeding? If you would put one thing on which there is disagreement or that needs to be, there needs to be meeting of minds, what would that one thing be, in your mind?

Ashar, I'm not sure I could say that there is one thing because if you look at the commitment that NextEra has made, there are a lot of commitments covering many different areas. And it really is a total package so it is a weighing of all of the different pieces whether that be with respect to customer benefits or that be with respect to ring fencing governance issues. So, I don't think there's any one in particular because this also has not been, you know, necessarily a back and forth.

This has been the cross-examination first of us on our side and then now the cross-examination of the intervener's witnesses. So you know, you're seeing all kinds of issues come out to be decided by the commission.

Okay. And then i know you gave some timeline's but Connie, what can be the latest that the commission rules on this? Can you give to us?

They could rule, they could take as long as they want, Ashar. It is not unlike our rate cases where there are no statutory deadlines.

Okay. Okay. And you have not pushed them toward getting a decision by a certain date or anything like that?

Well, you know, Ashar, from the start, they've been well aware of the provisions in the merger agreement. And the chair has referred to those. But you know, beyond that, the process really is within their purview and it is their process.

Ashar, it is Jim. Let me add one thing to it. The merger agreement technically does not expire on the 3rd of June. However, it will take the consent of the parties to continue the arrangement just exactly as Connie said earlier. So think about it sort of that way. We're not necessarily pencils down at that point in time.

Okay. Okay. Great. And I do echo Andy's thought that, you know, I know you guys are busy on this but we should try to get some authorization on this low oil and try to see if we can hedge. If the budget doesn't go through, at least we have something to fall on. We don't lose this opportunity. I think it is a one in a lifetime opportunity to have oil at $25 a barrel.

Yes. We don't disagree with you, Ashar. Or with Andy.

Okay. Okay. Appreciate it.

Thank you. Ladies and gentlemen, that does conclude our Q&A session for today. I would now like to turn the call back over to Mr. Chen for closing remarks.

Thank you, Andrea. Thank you everyone for your participation. Have a good day, all.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.